Roger McNamee is one of the smartest investors in tech, seemingly always ahead of the curve. A long-time sounding board to Bill Gates he was an early investor in companies like Palm, Electronic Arts, and Facebook. He has also not hesitated to be fiercely critical, writing an unsparing book about the danger social media poses to democracy.
So his recent op-ed about “Big Tech’s Lost Decade” is something we should take seriously. McNamee points out that the enormous tech valuations—more than 1000 startups have been valued at over a billion dollars—is more due to a loose financial and regulatory environment than to significant innovation.
The signs have been there for awhile. I wrote about how the digital era was ending five years ago. Yet McNamee takes it further, calling for stricter regulation and a “transformation in culture, business models and industrial structure.” It seems that reckoning is approaching. Hopefully, it will make our economy safer, more equitable, innovative and productive.
The Great Digital Dissonance
In 1982, when Steve Jobs was trying to lure John Sculley from Pepsi to Apple, he asked him, “Do you want to sell sugar water for the rest of your life, or do you want to come with me and change the world?” The ploy worked and Sculley became the first CEO of a major conventional company to join a hot Silicon Valley startup.
That was 40 years ago and since then, with the exception of eight years in the late nineties and early aughts, productivity growth has remained depressed. At the same time, income inequality has increased and business has become less dynamic, with fewer startups and less churn among market leaders.
You would think that the decades of consistent failure would be some cause for reflection, but not at all. Lean startup guru Eric Ries—who never ran a successful business himself—went to indoctrinate General Electric on The Startup Way (and we know the results of that!). Tech entrepreneurs like Marc Andreesen and Peter Thiel seek to reshape politics. Elon Musk trolls Twitter while Tesla loses massive value.
Meanwhile, the scandals keep piling up. Theranos and FTX were hailed as Silicon Valley paragons until they were exposed as little more than Ponzi schemes. Tech VC’s plowed tens of billions of dollars into WeWork and Uber before it became clear that their business models weren’t viable.
In earlier eras, failures on this scale were cause for soul searching and new legislation, such as Sarbanes-Oxley, to curb excesses. Today, voices like McNamee’s remain rare.
The Promise Of Increasing Returns
I was working on Wall Street in 1995 when the Netscape IPO hit like a bombshell. It was the first big Internet stock and, although originally priced at $14 per share, it opened at double that amount and quickly zoomed to $75. By the end of the day, it had settled back at $58.25 and, just like that, a tiny company with no profits was worth $2.9 billion.
It seemed crazy, but economists soon explained that certain conditions, such as high upfront investment, negligible marginal costs and network effects, would lead to “winner take all markets” and increasing returns to investment. Venture capitalists who bet on this logic would, in many cases, become rich beyond their wildest dreams.
That train of thought is what led Marc Andreessen to declare, in 2011, that software is eating the world. “With lower start-up costs and a vastly expanded market for online services,” he wrote, “the result is a global economy that for the first time will be fully digitally wired — the dream of every cyber-visionary of the early 1990s, finally delivered, a full generation later.
The conditions for increasing returns, however, only apply to a narrow swath of businesses, mostly limited to software and electronic gadgets. Nevertheless, entrepreneurs and their investors became convinced that they could apply the Silicon Valley model anywhere, leading to the high profile failures that have become endemic.
The Silicon Valley Doomsday Machine
Over the past few decades “digital” has become synonymous with technology and innovation, but there’s no reason to think that this era is fundamentally different from earlier booms. The internal combustion engine and electricity transformed the 1920s and 1930s. The Green Revolution and a golden age of antibiotics transformed agriculture and medicine, respectively in the 50s and 60s.
Each of these waves had profound impacts. Automobiles revolutionized supply chains, which helped shape the modern retail industry and made suburbs possible. The Green Revolution not only alleviated hunger, but made it possible for poor countries to industrialize. Before antibiotics, even a small paper cut could go septic and become fatal.
The digital revolution, in perspective, isn’t substantially different from any of these. It has followed the typical “s-curve.” It started rather slowly, then had a period of rapid expansion and now, with Moore’s Law ending, the technology is beginning to mature. We’re seeing consolidation, rent-seeking and regulatory capture—all signs of an industry in decline.
At the same time evidence suggests that the billions wantonly plowed into massive failures are crowding out real businesses. Clearly, we need to do things differently.
Shifting From Bits Back To Atoms
Clearly, there is something afoot in Silicon Valley. The technology is maturing, the scandals keep getting bigger and, with information and communication technologies representing a mere 6% of advanced economies, we still have yet to see anything approaching the impact of earlier technology revolutions.
Make no mistake, a reckoning is fast approaching. The EU is expected to tighten regulations, while the SEC plans to make it easier for investors to sue venture capital players for negligence. FTC Chair Lina Khan is taking on megadeals like the Microsoft-Activision merger, while the Justice Department goes after Google’s stranglehold on the ad market. The era of loose regulation and easy money that has fueled the last decade is ending.
The truth is that while Silicon Valley’s way of doing things works perfectly well for software and consumer gadgets, it is rarely a good fit for atom-based industries. Yet there are real opportunities ahead in using bits to drive atoms. Technologies like synthetic biology, mRNA vaccines and materials science depend on computation to power clean energy, medicine and advanced manufacturing.
What’s becoming clear is that we can’t just move fast and break things anymore. That might work for the digital world, but for mission-critical technologies that need to power billion-dollar factories, medical therapies that people’s lives depend on or agricultural techniques that need to feed the world, we need to be far more careful.
Most of all, we need to shift from disruption to resilience and be clear-eyed about the fact that the future will not look like the past. We need to learn from the mistakes of the digital age, not repeat those same errors in some misguided effort to market our failures into perceived successes. We need to march boldly forward, wiser and better equipped.